GAO Recommends Imposition of Asset Transfer Penalties for VA Pensions

After a year-long investigation, the United Stated Government Accountability Office ("GAO") is recommending that Congress enact legislation that would impose asset-transfer penalties for veterans applying for VA pensions.  Presently, there are no asset-transfer restrictions for the VA pension program

Under current law, veterans who served during war time (they need not have served in combat or even in a combat theater) and who have high medical-related expenses (including the costs for home health aids or assisted living) may be eligible for a VA pension that can pay up to $2,019 per month.  The key requirements are that (i) the monthly out-of-pocket medical expenses must exceed the household income, and (ii) the veteran's assets (and his/her spouse's, if applicable) cannot be "excessive". Unlike the Medicaid program, which has a defined maximum resource limit of $14,250, the VA pension program has no fixed number.  Rather, a "safe" range is often considered to be $20,000 to $50,000, although the VA examiner has wide discretion in determining asset eligibility.

The GAO report claims that over 200 organizations have been identified that claim to assist veterans to obtain a VA pension.  The report alleges that many of these organizations sell veterans unsuitable products in order to become pension-eligible.

While there are almost certainly abuses among certain organizations or companies that purport to assist veterans in navigating the VA pension system, in my view the report unfairly lumps skilled elder law attorneys with the "snake oil salesmen" that produce the worst abuses of the system.  Nonetheless, it appears that there is growing bipartisan support in Congress to implement asset transfer penalties similar to the transfer penalties currently imposed for other means-tested programs such as SSI and nursing home Medicaid.

Click here for the New York Times story on the GAO report.

Forbes Article Highlights Key Estate Planning Mistakes

Rob Clarfeld, a CPA and Certified Financial Planner who writes periodically for Forbes, recently highlighted seven major estate planning errors.  In my view, he couldn't be more on point.   Number two on his list is the ever-increasing use of "do it yourself" estate planning through LegalZoom and similar websites.  As he says, doing your own estate planning "is a recipe for disaster."

Clarfeld also underscores the importance of ensuring that your beneficiary designations and asset titling must be consistent with your estate plan; far too often the client's planning documents (e.g., wills and trusts) provide for a particular result, but the assets are titled incorrectly (e.g., often jointly titled with another owner), and the beneficiary designations listed on the clients retirement accounts, annuities and life insurance are inconsistent with the client's planning goals.

Clarfeld's final "major" error -- "Leaving assets outright to Adult Children" -- parrots what I have been advocating for the past 13 years; namely, that one of the best gifts we can provide to our adult children is to leave their inheritance in trust.  These lifetime trusts need not at all be restrictive or otherwise prevent the children from having use and access of the inheritance.  To the contrary, a child's trust can be designed as a "beneficiary controlled trust" that allows the child to serve as his or own trustee having access to the trust assets.  If, however, the child were to someday go through a divorce or have creditors knocking at their door, the trust assets -- assuming the trust is properly structured and maintained -- would be deemed off-limits to those "creditors and predators."

State-by-State Estate Tax Survey

The American College of Trust and Estate Counsel has just released this comprehensive Death Tax Chart summarizing the estate and inheritance tax laws currently in effect in the 50 states and the District of Columbia.  Of the local jurisdictions, New York, New Jersey and Connecticut each have a state estate tax distinct from the federal estate tax, while Pennsylvania has a state inheritance tax.

Signing a Nursing Home Admissions Agreement may be Hazardous to Your Wealth

Admitting a parent into a nursing home is a traumatic experience on many levels. Not only do children often deal with guilty feelings when making at such a decision, the nursing home admissions process is replete with paperwork and bureaucratic jargon that only adds to the stress.

 

Sometimes nursing homes will “require” the child to guarantee payment for the cost of a parent’s care in the nursing home.  Under the Federal Nursing Home Reform Act, however, a nursing home is prohibited from requiring a third party to guarantee payment to the facility as a condition of admission of another party.  Any child who signs such a guarantee can later disavow the guarantee without consequence.  

But even though a child cannot be required to guarantee payment for a parent’s nursing home care with the backing of the child’s assets, a recent New York appellate court case makes clear that a child can be held responsible for reneging on a written promise to a nursing home to apply the parent’s own assets towards the cost of the parent’s nursing home care.

In Troy Nursing & Rehabilitation Ctr., LLC v. Naylor, (N.Y. App. Div., 3d Dept., No. 512311, March 20, 2012) Diana Gaetano signed an agreement with Troy Nursing & Rehabilitation Center in which Ms. Gaetano promised, as agent under her father’s power of attorney, to use her father’s assets to pay for her father’s care in the facility.  After Ms. Gaetano reneged on that promise, the nursing home filed suit against her, seeking damages of over $80,500 plus interest.

In March 2011, Judge Hummel of Rensselaer County Supreme Court granted summary judgment in favor of the nursing home.  Ms. Gaetano appealed.  In its opinion, the Third Judicial Department of the Appellate Division of the New York Supreme Court agreed with Judge Hummel that Ms. Gaetano was in fact liable for the cost of her father’s nursing home care. Specifically, the Court distinguished between a child’s guarantee to use her own assets to pay for care, which as noted above is prohibited under federal law, and a promise to use the nursing home resident’s own assets to pay for care, which the court held is an enforceable obligation.  The Appellate Court noted that federal law expressly authorizes a person “who has legal access to a resident’s income or resources available to pay for care in the facility, to sign a contract (without incurring personal financial liability) to provide payment from the resident’s income or resources for such care.” Ms. Gaetano’s agreement with the nursing home, said the Court, clearly met that definition. 

What’s the lesson to be learned from this case?  A child signing admission papers for a parent entering a nursing facility that participates in the Medicaid program (which the vast majority of nursing homes do) should avoid signing an agreement promising to use the resident’s assets to pay for the cost of care.  While a nursing home may refuse to accept a resident for failing to disclose assets, no facility that accepts Medicaid can prohibit a family from engaging in legitimate asset preservation techniques after the resident is admitted to the facility.  If the child signs an agreement like the one signed by Ms. Gaetano, however, the facility may subsequently assert a claim against the child that will be enforced by the courts, rendering ineffective any asset preservation planning that has been instituted.

Estate Disputes -- Are They Really About the Money?

In an excerpt from his new book Blood & Money: Why Families Fight over Inheritance and What to Do About it, attorney P. Mark Accettura argues that estate disputes are really less about "the money" than they are about psychological and physiological characteristics such as an innate disposition for conflict and the yearning for approval from a deceased parent that an inheritance is seen to represent.

When counseling clients regarding how to best pass their assets to their children or other loved ones, I spend considerable time delving into the background of the family and each individual member.  It is critical that as an estate planning attorney I learn everything I can about the relationships between and among family members so that I can help the client plan to minimize the possibility for conflicts among the family after the client is gone.  I don't take at face value any client's statement that "everyone gets along fine, and always will."  Instead I emphasize to them that, while it's certainly possible that family harmony will continue after the client's death, it is also as likely that the client has served as the "glue" who has helped smooth over simmering tensions among children or other family members. I emphasize that when the "glue" is gone, the tensions that have festered under the surface for years -- even decades --  may explode into a battle that may work it's way through court system for years, costing tens of thousands of dollars and leaving the family irrevocably broken.

Click here for the excerpt from Accettura's book.

New York's Expanded Estate Recovery Rules to be Repealed

Yesterday it was announced that Governor Cuomo and the New York Legislature had reached a deal on the 2012 New York State Budget.  Included in the new budget is a repeal of the expanded estate recovery rules that were enacted in last year's budget in an attempt to "recover" assets from the estates of Medicaid recipients.  As I explained in a previous post describing the estate recovery rules, the expanded estate recovery rules, among other things, would have unfairly penalized those thousands of New Yorkers who had years ago transferred title to their homes to their children while retaining a life estate in the home.

Prior to last year's enactment of the expanded estate recovery rules, a home transferred with a retained life estate would have been deemed an asset exempt from Medicaid recovery, so long as the Medicaid "look back period" (currently five years from the date of transfer) had elapsed.  Under the expanded estate recovery rules, the parent's life estate interest in the home was deemed an "asset" subject to recovery should the parent receive Medicaid benefits, even if the life estate transfer had been made years or even decades prior to the parent receiving Medicaid!  

The expanded estate recovery rules would have also played havoc with IRA's and similar retirement accounts, and would surely have led to expensive and protracted litigation.

Stay tuned, however, as New York will be looking for other means to raise revenue that will almost surely affect the elderly, the disabled and the poor.

News and Notes

I apologize for my readers -- I'm a bit behind in posting to the blog.  To get you up to speed, here's a few recent developments in the world of estate planning, estate administration and elder law:

• An Executor is not absolved from liability for late filing of estate tax returns notwithstanding attorney's obvious malpractice (and even criminal conduct) -- In Thomas Friedman vs. U.S., 109 AFTR 2d 2012-723, the executor of an estate hired an attorney who claimed to be experienced in estate administration matters to file the federal estate tax return.  The attorney apparently suffered from a myriad of "physical and mental ailments" resulting in the attorney's neglect in properly handling the administration, including the filing of the estate tax return.  Only three years after the filing due date did the executor learn that the estate tax return had not in fact been filed.  The executor then paid the tax due, as well as interest and significant late filing penalties. The executor subsequently sought a refund of the penalties and interest, relying on the doctrine   that he reasonably relied upon the attorneys' assurances that the attorney was taking care of the filing.  The Federal District Court in Pennsylvania, citing the precedent of a 1985 Second Circuit  decision, held that a taxpayer's duty to file a timely tax return is nondelegable, and that misplaced reliance upon professional assistance will not fall within the safe harbor of reasonable cause.

•  Mere retention of a testamentary power of appointment in a irrevocable "Medicaid Trust" alone may not be sufficient to render the trust "incomplete" for gift tax purposes.  The IRS recently issued this memorandum, which provides that transfers of assets to an irrevocable trust in which the grantor retains a testamentary power of appointment, without more, constitutes a completed gift of the transferred assets and requires the filing of a federal gift tax return (assuming the value of the transferred assets exceeds $13,000).  Although when Medicaid planning for a modest estate there would be no payment of gift taxes, the troubling issue with such a determination is that if there is a completed gift during lifetime, the trust assets would not be included in the grantor's estate at their death, and thus the trust assets would not be eligible for "step up in basis" treatment.  So, in the common situation where a primary residence is transferred to such a trust, the heirs (typically the grantor's children) will inherit the home at the parent's death with the parent's "carryover" cost basis, not the (usually much higher) date of death cost basis.  If, for example, the parents have a cost basis in the home (e.g., purchase price plus capital improvements) of $50,000, and the children sell the home after the parent's death for $250,000, without the benefit of the step-up in basis, the children will pay capital gains tax on the full $200,000 gain.  One solution to this issue is to include in the trust that the grantor(s) will retain some lifetime rights over the transferred property.  Such control might include a right to trust income, or the retention of a lifetime (rather than after-death) power of appointment.  Fortunately, our firm already routinely includes such lifetime income and power of appointment powers in our "Medicaid" trusts, so I am confident that clients for whom we have created such trusts will gain the benefit of the step-up in cost basis for the trust assets upon the grantor's death.

• The options for purchasing long-term care insurance continues to shrink. Prudential recently announced that it is following other prominent companies (including MetLife and Travelers) in abandoning the individual long-term care insurance market (Prudential will still sell group long-term care policies).  This excellent Wall Street Journal article discusses the increasing difficulty consumers will have in purchasing affordable long-term care insurance, and includes tips on how to shop for those policies that remain available.